In this issue:
1. Bill C-7 Receives Royal Assent June 23rd, 2009
2. Turn Life's Lemons Into Virtual Lemonade
3. Frugoli v. Services Aeriens - Time Bar Cannot Be Extended
by A Court in an Accident Involving a Single Boat
4. Insurer's Duty to Defend
1. Bill C-7 Receives Royal Assent June 23rd, 2009
On 29 January 2009, Bill C-7, An Act
to amend the Marine Liability Act and the Federal Courts Act and
to make consequential amendments to other Acts, was introduced in
the House of Commons.
The current Marine Liability Act,
which has been in force since August 2001, is the principal legislation
dealing with the liability of shipowners and ship operators in relation
to passengers, cargo, pollution and property damage. The intent
of the legislation, according to Transport Canada officials, is
to set limits of liability and establish uniformity by balancing
the interests of shipowners and other parties.
The proposed amendments to the Marine
Liability Act contained in Bill C-7 result largely from the Maritime Law Reform Discussion Paper released by Transport
Canada in May 2005 and the subsequent consultations that took place
with many stakeholders in all sectors of the marine community.
Bill C-7 received Royal Assent on
June 23rd, 2009 and most of its amendments will come into force
90 days thereafter (late September, 2009.) The amendments to Part
6 (concerning liability and compensation for marine pollution) will
come into force on a day to be fixed by order of the Governor in
Council and these amendments will be dealt with in a subsequent
The amendments coming into force in
September include the following highlights:
- C-7 amends current parts 3 and 4 of the Marine
Liability Act to clarify certain rules concerning the limitation
of shipowners' liability for maritime claims and liability for
the carriage of passengers, particularly in the marine adventure
- It creates a maritime lien against foreign vessels
for Canadian ship suppliers as security for unpaid invoices.
- It establishes a limitation period of three years
for all proceedings under Canadian maritime law that are not already
covered by a limitation period in a federal statute.
Passenger Definition Amended
Under the current legislation "passenger",
for the purposes of Athens Convention relating to the Carriage of
Passengers and their Luggage by Sea, 1974, as amended by the Protocol
of 1990 to amend the Athens Convention relating to the Carriage
of Passengers and their Luggage by Sea, 1974, is defined as a person
carried on a sea-going vessel, excluding an air cushion vehicle.
The definition of "passenger" has been extended
to include a participant in a marine adventure tourism activity,
a person carried on board a vessel propelled manually by paddles
or oars and operated for a commercial or public purpose, and a sail
Before and during the consultations on the proposed
amendments to the Marine Liability Act that took place in
2005-2006, industry stakeholders raised many concerns about the
liability regime introduced in 2001, which applied equally to commercial
passenger vessels and marine tourism enterprises and operators.
The regime also provided that waivers of liability, often used in
adventure tourism, would no longer be valid. The loss of this standard
risk management practice, combined with new limits of liability
introduced in 2001, made insurance unaffordable or commercially
unavailable to tourism operators. The amendment places the marine
adventure tourism industry in the position it occupied prior to
2001. This would enable operators to purchase adequate insurance
against the limits of liability that had always applied to them
in Part 3 of the Marine Liability Act and allows them to
use liability waivers with the same flexibility employed in the
Section 37.1 has been added to exclude the Athens
Convention from applying to an adventure tourism activity that meets
the following conditions:
(a) it exposes participants to an aquatic environment;
(b) it normally requires safety equipment and procedures beyond
those normally used in the carriage of passengers;
(c) participants are exposed to greater risks than passengers
are normally exposed to in the carriage of passengers;
(d) its risks have been presented to the participants and they
have accepted in writing to be exposed to them; and
(e) any condition prescribed under paragraph 39(c).
The new section 139 creates a maritime lien* against
foreign vessels as security for unpaid invoices to ship suppliers
operating in Canada. Departmental sources point out that maritime
liens currently exist in Canada with respect to crew wages, collisions,
salvage and port charges but not for ship suppliers. They note that
this is contrary to the situation in the United States, where legislation
specifically grants a US-based ship supplier a maritime lien on
a vessel for unpaid bills, thereby giving an advantage to US ship
suppliers over their Canadian competitors who may be supplying the
same vessel when it calls at a Canadian port. Under the current
arrangement, a US lien would be recognized in Canadian courts ahead
of any mortgages or similar claims by Canadian ship suppliers, who
are treated as unsecured creditors.
[*Note: A maritime lien is a secured claim against
a ship in respect of services provided to the vessel or damages
done by it. It arises without notice, registration or other formalities,
at the time the services are rendered or damages are done. It travels
with the ship, encumbering the title of subsequent owners or possessors
and surviving the sale of the ship.]
Limitation Period of Three Years
Under a new section 140 a general limitation period
of three years for all proceedings under Canadian maritime law that
are not already covered by a limitation period in a federal statute
has been created. (See for example s. 14 of the Marine Liability
Act, S.C. 2001, c. 6 which provides a two year limitation period
for actions involving a fatality, or Article III of Schedule 3 of
the Marine Liability Act, S.C. 2001, c. 6 which provides
a one year limitation period for actions involving carriage of goods
2. Turn Life's
Lemons Into Virtual Lemonade
When life throws you lemons, what can you do? A few
options exist. Firstly, you can do as they say and make lemonade,
but that is just way too cliché. Secondly, you can take arms
against a sea of troubles and by opposing, end them; of course this
Shakespearean suicidal approach (from Hamlet's famous "To Be
or Not To Be" soliloquy) is never the best option. Finally,
you can start your life afresh in a 3-dimensional virtual world
called "Second Life", an online platform that mimics life
in the real world. As you will find out, this final option is probably
the best choice as our society cruises further into the 21st century.
As its name suggests, Second Life provides an opportunity
to live a second life in a virtual form, separate and apart from
any aspect of the "physical" world. Online users who sign
up for this experience become "residents" in the Second
Life virtual world. These residents are then able to create their
own onscreen graphic characters known as avatars. It is through
these avatars that residents are able to navigate this virtual world
and interact with millions of other residents while creating, designing,
buying and selling any virtual objects they want along the way.
What sets Second Life apart from other virtual worlds
on the Internet is that its objective is not that of a typical game.
There is no winning or losing. There are no scores or levels to
conquer. The objective is simply to live a second life in a world
that simulates our very own physical realm, and it is the residents
of Second Life who create all of the virtual objects and infrastructure
found within the experience including virtual buildings, beaches,
nightclubs and roads-just to name a few.
Second Life also has its own internal currency called
the Linden dollar, which is named after Linden Lab, the company
behind the development of the service. The Linden dollar can actually
be exchanged for U.S. currency at online currency exchanges at a
floating exchange rate of about 270 Lindens to 1 U.S. dollar. Additionally,
currency can also be traded within Second Life at a virtual exchange
location called the LindeX where currency can be bought and sold
using credit cards or Paypal.
In addition, business opportunities are abundant in
Second Life. Residents can start up and run their own businesses
or seek employment elsewhere in order to generate Linden dollars.
There are no limitations on the types of virtual employment opportunities
available, and they can even be facilitated through virtual staffing
agencies. The types of jobs available include nightclub promoters,
landscapers, theme park developers, car manufacturers, tattooists,
fashion designers and thousands of others. Residents can buy and
sell everything from virtual houses, property, body parts, labour,
and other services including sex. This real world commoditization
of the virtual world has fostered a culture of limitless innovation
and profit making. This has allowed Second Life to support an economy
of its own where millions of real U.S. dollars exchange hands every
month through this commerce, making many virtual residents real
Second Life's first reported millionaire operates
out of China through an avatar named "Anshe Chung". Anshe
Chung began her fortune by making small-scale purchases of virtual
real estate, which she then subdivided for rent and sale to other
residents for Linden dollars. Today, Anshe Chung focuses on developing
and selling virtual properties to many real world mega corporations
who are actually interested in establishing a genuine presence in
this virtual world. As unreal as this may sound, it is not something
to laugh about. After all, consider what it would mean for corporate
planners to be able to experiment with models of their suppliers,
customers and employees in a virtual world.
Many well-known corporations have already made their
mark in Second Life. MTV has purchased virtual land and developed
a nightclub in Second Life. Toyota Motor Corp. also has an established
presence, which sells digital cars for residents to customize. IBM
has purchased 12 islands, one of which is used privately to host
business events for its global employees with Second Life accounts
to engage in sensitive proprietary discussions and conferences without
requiring any physical travel.
Some countries are even beginning to establish a diplomatic
presence within Second Life. For example, in May 2007, the Swedish
Government opened up the world's first virtual embassy in Second
Life. Although Sweden's virtual embassy will not issue passports
or visas, it will serve to instruct Second Life visitors on how
to obtain such documents in the real world, and provide a portal
to web-based information about Sweden. Similarly, the Government
of Estonia is investing over $8,700 in developing a virtual Second
Life embassy as well. These countries pride themselves on being
at the forefront of technology, and this is an opportunity to perpetuate
this reputation in a virtual world that is likely to become even
more complex over time. This begs the question of what legal implications
will this have for the future?
IP issues in Second Life are worth mentioning. The
developers of Second Life have provided through the terms of service
that all the IP rights are to extend to all users of the service
for all creations made by the users. This means that once a Second
Life user creates something, that resident's IP right is protected
both on and offline and will extend to commercial or non-commercial
use of whatever is created. However, despite this, there still exist
problems with guaranteeing actual enforcement of such IP protection
within Second Life. Moreover, there exists potential trademark infringement
as corporate brand owners are being falsely represented in the form
of virtual goods, which are sold for profit by users in Second Life.
These include virtual iPods, Ferraris, and Rolex watches amongst
others. Whether these brand owners will be forced to crack down
on counterfeits in Second Life like they do in the real world remains
to be seen for now.
Other foreseeable legal considerations for the future
are endless. Take family and property law for example. Residents
in Second Life can "marry" through ceremonies. Virtual
assets owned by the marrying parties may need to be dealt with specifically
in agreements in the event of separation or "divorce".
Moreover, property encroachments in Second Life may become more
frequent as users continue to build more virtual real estate assets
on others user's virtual property. Last but not least, matters of
national security may also be of relevance as several real world
intelligence services have suggested that Second Life can serve
as a terrorist hub to recruit others and mimic real life terrorism.
Terrorism experts have confirmed the possibility of "Jihad
terrorists" assuming identities within Second Life to build
a community of extremists and plan real world atrocities. Clearly
there exist many other future legal considerations, but it is impossible
to mention all of them.
Technology is now evolving to the point where the
real world is being blurred with the virtual world. Although risks
exist with the introduction of any revolution, we should be able
to minimize these risks and savour the benefits by keeping our laws
attuned with technological advancement, and turning virtual lemons
into lemonade for everyone.
3. Frugoli v. Services Aeriens - Time Bar Cannot Be Extended
by A Court in an Accident Involving a Single Boat
On August 29, 2002, on the occasion of participating
in a hunting expedition in the northern region of Quebec, Joseph
M. Frugoli and Wayne Herbert Raschke (the "Deceased")
both residents of Chicago, Illinois in the United States died, presumably
by drowning, when the boat in which they were passengers capsized
while crossing Lake Louis. Their bodies were never recovered. Lake
Louis is 20.6 kilometers long and 1.6 kilometers wide. Access to
it is by way of hydroplane.
The widows and children of the Deceased as well as
the estates of the Deceased brought suit against Services Aériens
des Cantons de L'Est Inc. ("Services Aériens"),
the commercial outfitter of the expedition and Raymond Smith ("Smith")
its employee who was operating the boat at the time of the accident.
The claimants filed legal proceedings against respondents
in the Circuit Court of Cook County Illinois on August 26, 2004,
less than two years after the accident. The jurisdiction of the
Illinois Court was challenged, but the question of its competence
had not yet been decided by the time the Quebec Court of Appeal
issued this ruling.
The claimants also instituted proceedings against
the same defendants in the Superior Court of Quebec on April 26,
2005. This was more than two years, but less than three years, after
the death of the Deceased on August 29, 2002.
The Superior Court ruled that the subject matter of
the actions was that of Canadian maritime law and accordingly, within
exclusive federal legislative jurisdiction. Hence the statutory
provision of the Marine Liability Act which at s. 14(2) establishes
a limitation period of two years for commencing an action, was applied,
to the exclusion of the three-year prescription in article 2925
of the Civil Code of Quebec. The motions judge also ruled that he
had no authority, pursuant to the Marine Liability Act, to
prolong the limitation period and also that he had no inherent jurisdiction
to do so. Furthermore, in an obiter dictum, he stated that
he would not have granted an extension of time, even if he had the
authority to do so. Thus, the motions to dismiss the actions were
maintained and the motions to extend the limitation period were
dismissed, the whole with costs.
The parties had agreed to file certain material before
the motions judge setting forth the relevant facts with respect
to the navigability of Lake Louis. The motions judge, in this regard,
 The additional facts disclosed in these documents
a) Lake Louis is a large body of water, 20,6 kilometers
in length by 1.6 kilometers in width, Its perimeter is 46.08 kilometers.
Its depth is approximately 30 meters (100 feet).
b) the Defendant Services Aériens des Cantons
de l'Est Inc. runs open motor-boats of more than 16 feet in length
and has built a wharf to moor its boats and sea-planes, used to
carry passengers and equipment on and out of its hunting and fishing
installations situated on or around Lake Louis.
c) Lake Louis is consequently used as a waterway
in that sea-planes will land thereon and take off thereof and
the lake will serve as a way and means of communication, the whole
within the context of a recreational or commercial exploitation.
The Quebec Court of Appeal affirmed the decision of
the motions judge. It held that:
"A subject matter comes within Canadian maritime
law when it is so integrally connected to maritime matters as
to be legitimate Canadian maritime law within federal competence.
The motion to institute proceedings meets the above
criterion. It is perfectly clear from the description of the cause
of action that the subject matter is one which is squarely in
the category of a death resulting from navigation in a boat on
a lake. This is in the domain of federal maritime negligence law.
It is not relevant that Lake Louis is in an isolated area, nor
that there may be no commercial shipping on it. Accidents involving
boats on inland lakes are matters of Canadian maritime law and
are within exclusive federal legislative jurisdiction.
The Court found that the limitation period for taking
the action is, by virtue of s. 14(2) of the Marine Liability
Act, two years stating "the fact that art. 2925 C.C.Q.
provides a prescription period of three years is of no relevance
to the proper application of Canadian maritime law in these appeals."
The Court of Appeal then had to decide if it had discretion
to extend the limitation period under the Marine Liability Act,
or under its inherent jurisdiction and if so had the motions judge
The motions judge concluded that the provisions at
s. 23(2)(a) of the Marine Liability Act with respect to extending
the limitation period apply only to cases where the claim arises
from a collision between two boats. Consequently, he ruled that
the Court had no discretion or authority to authorize an extension
of the limitation period because the deaths did not occur as a result
of the collision of two boats.
Section 23 of the MLA provides:
23. (1) No action may be commenced later
than two years after the loss or injury arose to enforce a claim
or lien against a ship in collision or its owners in respect of
any loss to another ship, its cargo or other property on board,
or any loss of earnings of that other ship, or for damages for
loss of life or personal injury suffered by any person on board
that other ship, caused by the fault or neglect of the former
ship, whether that ship is wholly or partly at fault or negligent.
(2) A court having jurisdiction to deal with an
action referred to in subsection (1
(a) may, in accordance with the rules of court,
extend the period referred to in that subsection to the extent
and on the conditions that it thinks fit; and
(b) shall, if satisfied that there has not during
that period been a reasonable opportunity of arresting the ship
within the jurisdiction of the court, or within the territorial
waters of the country to which the claimant's ship belongs or
in which the claimant resides or has their principal place of
business, extend that period to an extent sufficient to provide
that reasonable opportunity.
The Court of Appeal of Quebec summarized the issue
before it had to be decided according to the rules and principles
of Canadian maritime law, which is a uniform body of law applied
throughout Canada, consisting of statutory Canadian maritime law
and non-statutory Canadian maritime law.
The Court concluded that the statutory Canadian maritime
law applicable in this case is set out in the Marine Liability
Act. It states the one specific instance, - a claim resulting
from a boating collision, when a Court has discretionary authority
to extend the limitation period. It provides no authority or jurisdiction
for a Court to grant an extension in other instances.
The Appeal Court also concluded that because the Marine
Liability Act expressly gives authority, in the same statute,
for an extension of the limitation period to commence an action
only in the case of a collision between boats, Parliament has thereby
expressed its refusal to give such authority in cases involving
claims which result from the capsizing of a boat.
The Appeal Court added:
"In view of our conclusion that statutory Canadian
maritime law does not permit the extension of the limitation period
in non-collision claims, it is not necessary to review the question
pertaining to non-statutory Canadian maritime law because the
latter may not, in any event, provide a measure which is contrary
to statutory Canadian maritime law."
The Appeal Court referred to the Ontario Court of
Appeal decision in Ordon v. Grail 1996 CanLII 3060 (ON C.A.),
(1996), 30 O.R. (3d) 643 where it appears that the Ontario Court
of Appeal extended a statutory limitation period. Ordon v. Grail ended up in the Supreme Court of Canada where the latter court felt
it did not have to decide the limitation issue by extending the
relevant statutory limitation period.
The Appeal Court (in Quebec) noted that Ontario Court
of Appeal, after the Supreme Court of Canada heard Ordon v. Grail,
has in Desautels v. Katimavik appeared not to have followed
its previous judgment in Ordon Estate.
In Desautels v. Katimavik Justice Goudge, with
the approval of Chief Justice of Ontario McMurtry wrote:
"24. Nor should we be taken to agree with the
finding of the trial judge that the Court can use its discretion
to extend a statutory limitation period. That is the very question
that was left open by the Supreme Court of Canada in Ordon Estate
v. Grail, 1998 CanLII 771 (S.C.C.),  3 S.C.R. 437."
Justice Laskin, concurring in the result, in separate
"49. The trial judge wanted to avoid the injustice
for the appellants brought about by the changes in the law. I
sympathize with her desire to do so. I am not satisfied, however,
that the case law from the Supreme Court and this court permitted
her to do so.
50. In holding that the court had an inherent jurisdiction
to extend a limitation period to preserve an action the trial
judge relied on this court's decision in Ordon Estate v. Grail
1996 CanLII 3060 (ON C.A.), (1996), 30 O.R. (3d) 643, and Dreifelds
v. Burton 1998 CanLII 5013 (ON C.A.), (1998), 38 O.R. (3d) 393,
leave to appeal refused  S.C.C.A. No. 261, and on the Supreme
Court's decision in Basarsky v. Quinlan, 1971 CanLII 5 (S.C.C.),
 S.C.R. 380. In Ordon Estate and Dreifelds, both complex
maritime law cases, this court affirmed an inherent jurisdiction
to extend a statutory limitation period to prevent an injustice.
But the Supreme Court has not adopted this principle. Instead,
in Ordon Estate v. Grail, 1998 CanLII 771 (S.C.C.),  3 S.C.R.
437 it concluded that it did not have to decide the point. Moreover,
Dreifelds and Basarsky are both distinguishable from this case.
In Dreifelds, Goudge J.A. writing for the court relied principally
on the statutory discretion to extend a limitation period in s.
2(8) of the Family Law Act, R.S.O. 1990, c. F.3. Apart from the
disability provision, which is not applicable here, the Alberta
statute contains no similar statutory discretion. And in the Basarsky
case, the Supreme Court held that after the expiry of a limitation
period it had a discretion to add a party or a new claim to an
action properly commenced within the limitation period. Again,
this was not the situation here."
The Court of Appeal for Quebec concluded by essentially
stating that it did not agree with the Ontario decision in Ordon
"With great respect for the judgment of the
Court of Appeal for Ontario in Ordon Estate, we conclude
that Canadian maritime law does not authorize the extension of
the limitation period for commencing an action, except in the
case of collisions between boats, and that the Court does not
have any inherent jurisdiction to extend the two-year limitation
period set out in s. 14(2) of the MLA for commencing an action,
such as the ones with which we are concerned."
The two claims were affirmed as time barred.
4. Insurer's Duty to Defend
Under established principles of law, an insurer's
obligation to defend an insured in a lawsuit is 'broader' than the
obligation to 'indemnify'. The starting point on the analysis as
to whether there is a 'duty to defend' concerns whether the claim
by the plaintiff pleads facts that come within the coverage grant,
and are not excluded. The facts are deemed to be established for
this analysis. If the facts amount to 'conduct' for which the insured
is covered under the policy, as a general rule the duty to defend
is triggered. The facts may however not ultimately be proven at
the trial down the road, resulting in a vindication of the defendant
insured. The insurer's policy duty to indemnify will then not be
triggered. Hence, the general legal proposition that the "insurer's
duty to defend is broader than it's duty to indemnify".
Our courts have however in recent years considered
whether the claim in question should be given a strict literal or
'form' interpretation on a duty to defend analysis. Should the analysis
come to be determined strictly by the words employed by the lawyer
for the plaintiff? Should that lawyer be able to 'trigger' coverage
by a selection of words, or by skillful pleading, in elevating claims
otherwise excluded by the language of the insurance policy (for
which no duty to defend arises, from the 'get go') into covered
conduct not excluded? The usual example is the categorization of
intentional wrongful conduct [excluded from coverage] into negligent
conduct with unintended results [generally coverage].
The recent decision in O'Leary et al v. AXA Pacific
Insurance Company (2009) 95 O.R. (3d) 315 (ON. S. C.) employs a
'substance over form' review of a plaintiff's pleading in the context
of a 'duty to defend' analysis.
Discount Mortgage Canada Inc. ("Discount")
is in the mortgage brokerage business. Discount was insured by AXA
Pacific Insurance Company ("AXA") pursuant to the terms
of a Mortgage Brokers Professional Liability Policy [the "Policy").
As explained below, certain employees of Discount
came to be named as 'defendants by counterclaim' along with other
parties by one Tracey Lee Jones ("Jones") who was in default
under the terms of a residential mortgage. The Discount employees
in question (the "Applicants") applied to the Court for
an order that AXA owed them a defence obligation under the Policy.
The Royal Bank of Canada ("Royal Bank")
commenced a lawsuit in June of 2008 against Jones for the amount
due under a mortgage and for possession of the mortgaged residential
Jones defended the Royal Bank's action, also filing
a "counterclaim" against the Royal Bank, one Dwayne Deneka
(who was the vendor of the property to her and an employee of Discount),
the Applicants, Discount and one Theresa Zehr who was a Royal Bank
In her defence to the action by the Royal Bank, Jones
sought an order that it could not enforce its rights under the mortgage
on the basis that the mortgage was placed through misrepresentation,
fraud or a breach of duty owed to her. In particular, Jones alleged
that her mortgage application had been falsified by one or more
of the defendants that she named by the 'counterclaim' filed in
the action by the Royal Bank. She alleged that this was done without
her knowledge and with the intent of qualifying her for a mortgage
for which she would not otherwise have qualified in accordance with
the usual and ordinary lending practices of the Royal Bank.
Jones also alleged that the defendants to the counterclaim
(the Royal Bank, Deneka, the applicants, Discount and Theresa Zehr)
had 'superior knowledge' in relation to herself and that they owed
her a fiduciary duty in view of their knowledge that she had relied
upon them in the mortgage application process. Jones complained
that she was not provided 'appropriate cautionary advice' against
'taking the financing that was ultimately secured' by the mortgage.
It is important to note then, that Jones's counterclaim pleads both
fraudulent conduct and negligent conduct against those with whom
she had a grievance.
Jones alleged that the applicants were employed by
Discount, with the latter accordingly being vicariously liable for
the conduct of the former.
The Coverage Question and the Duty to Defend
AXA undertook the defence for Discount in the counterclaim
by Jones for the non-intentional conduct alleged under certain "Innocent
Insured" coverage, cited below. AXA however denied that it
had any obligation to represent the Applicants separate from its
provision of a defence for Discount, or to defend conduct excluded
The general Policy coverage grant was as follows:
To pay on behalf of the insured, Damages and
Claims Expenses which the insured shall become legally obligated
to pay because of any Claim or Claims first made against any Insured
and reported to the Insurer during the Period of Insurance or
Extended Reporting Period, arising out of any act, error or omission
of the Insured rendering or failing to render Professional Services
while acting in the capacity of a Mortgage Broker, for others
on behalf of the Named Insured designated in the declarations
and caused by the Insured except as excluded or limited by the
terms, conditions and exclusions of this Policy.
The Policy contained the following exclusion:
The coverage under this insurance does not
apply to Damages or Claims Expenses incurred with respect:
(a) to any claim arising out of any criminal,
dishonest, fraudulent or malicious act, willful error or omission
of any insured, acting alone or in collusion with others.
AXA defended Discount pursuant to a portion of the
Policy titled "Innocent Insured". By this particular wording,
where coverage would be excluded "because of any exclusion
relating to criminal, dishonest, willful, fraudulent or malicious
acts, errors or omissions by any insured, and with respect to which
any other insured did not personally participate or personally acquiesce
or remain passive after having personal knowledge thereof"
the Insurer would agree to provide coverage.
The applicants asserted that Jones raised claims both
coming within the terms of the Policy as well as falling outside
of such coverage. However, in seeking the relief sought against
AXA, they cited the following standard principles endorsed by the
Supreme Court of Canada:
a) the pleadings govern the duty to defend;
b) the duty to defend is broader than the duty to
indemnify. The mere possibility that a claim will succeed will suffice.
c) the duty to defend arises only with respect to
claims which, if proven, will fall within the scope of coverage
provided by the policy.
In essence, as the claim by Jones pleaded aspects
of negligence, which would be covered [the applicants being 'unnamed
insureds' in the Policy] by applying the above principles the Court
should order AXA to provide them a defence.
AXA in turn took the position that the true nature
of Jones's claim is one alleging criminal conduct, in the form of
fraud and that any unintentional conduct, such as negligence, is
merely "derivative" conduct excluded from coverage. AXA
asserted as an alternative argument that if the court should find
that the claim includes independent allegations of unintentional
conduct, that it nevertheless should not be obliged to defend the
applicants on the basis that its defence being provided for Discount
(for the non-intentional conduct alleged) necessarily provides a
defence to the applicants (as unnamed insureds) against those allegations.
AXA argued that it should not have to defend the applicants from
the allegations of fraud which is clearly excluded from coverage.
The court determined that the resolution lies in the
determination of the 'true nature' of the claim pleaded, relying
on the Supreme Court of Canada decision of Non-Marine Underwriters,
Lloyd's of London v. Scalera  1 S.C.R. 551. The cite that
follows, while lengthy, from the Scalera decision [at paras 84-86]
provides important guidelines in the determination of what a claim
is really about for the purposes of considering a duty to defend:
A court must therefore look beyond the labels
used by the plaintiff, and determine the true nature of the claim
pleaded. It is important to emphasize that at this stage a court
must not attempt to determine the merit of any of the plaintiff's
claims. Instead, it should simply determine whether, assuming
the verity of all of the plaintiff's factual allegations, the
pleadings could possibly support the plaintiff's legal allegations.
Having construed the pleadings, there may
be properly pleaded allegations of both intentional and non-intentional
tort. When faced with this situation, a court construing an insurer's
duty to defend must decide whether the harm allegedly inflicted
by the negligent conduct is derivative of that caused by the intentional
conduct. In this context, a claim for negligence will not be derivative
if the underlying elements of the negligence and of the intentional
tort are sufficiently disparate to render the claims unrelated.
If both the negligence and the intentional tort claims arise from
the same actions and cause the same harm, the negligence claim
is derivative, and it will be subsumed into the intentional tort
for the purposes of the exclusion clause analysis. If, on the
other hand, neither claim is derivative, the claim of negligence
will survive and the duty to defend will apply
. A claim
should only be treated as 'derivative', for the purposes of this
analysis, if it an ostensibly separate claim which nonetheless
is clearly inseparable from a claim of intentional tort.
This reasons for this conclusion are twofold.
one must always remember that insurance is presumed
to cover only negligence, not intentional injuries. Second, this
approach will discourage manipulative pleadings by making it fruitless
for plaintiffs to try to convert intentional torts into negligence,
or vice versa. While courts should not concern themselves with
whether or not pleadings are designed to generate insurance coverage,
following the guidelines set out above will provide insurers with
sufficient protections against manipulative pleadings.
Following the above guidelines the Court concluded
that "both the negligence and the intentional tort claims arise
from the same actions and cause the same harm". The essence
of the claim by Jones was the fraud alleged on the part of the defendants
by counterclaim in procuring a mortgage loan that she was otherwise
unqualified to receive, by keeping her in the dark about their failure
to perform various duties owed to her. The claims of negligence
against the applicants were accordingly found to be 'derivative'
and were 'subsumed' into the intentional tort of fraud, falling
within the above noted policy exclusion.
Accordingly, AXA was held to have no duty to defend
the applicants in the counterclaim by Jones. By the application
of the Scalera principles cited above, AXA did not have to defend
the applicants in respect of the allegations of fraud (clearly excluded
from coverage) or in respect of the allegations of negligence, on
the basis that the true nature of the allegations of negligence
(which, on a literal or an 'on the face of things' approach would
seem to come within coverage) derived from the allegations of fraud.
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